The,Pitfalls,Investment,Real,E business, insurance The Pitfalls of Investment Real Estate

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It was over twenty years ago that I attended a seminar presented by noted speaker Robert Allen. He had written a book called, “Nothing Down,” that explained how you could amass a fortune in real estate with virtually no money. I joined about fifty other wannabe millionaires in a motel meeting room as he described the mystical world of real estate investing. The syllabus outlined the basic steps of finding properties that were at, or below, value, making low-ball offers and obtaining 100% mortgages. Then one would simply rent the property for a sum large enough to cover the payment and move on to the next property to repeat the process, Eventually, you might have millions of dollars worth of real estate increasing in value every year and costing you nothing. You even got to write off the maintenance fees and other property improvements, along with the mortgage interest, he stated gleefully. Somewhere along the line, I didn’t realize I would be paying taxes on the rent as income, but that’s a minor point. In addition, unless you had great credit and a steady job, you might have a problem finding a lender. And you most likely needed a real estate agent to help you find the qualifying property at the right price and in the right location. You also had to have enough extra savings to cover the closing costs, but I’m sure all this was spelled out in the seminar. It just wasn’t the primary focus, I surmise. Instead, we were treated to a wonderful pep rally full of cheers and applause as Mr. Allen rolled out the program and told us we could, should, and probably would, all be living the good life in a few, short years. I left feeling happy, optimistic, and ready to seize that first piece of real estate. We had very little savings and therefore, had to be realistic in our beginning purchase. After excluding all the available houses that would have cost too much to close, we found a small condo in a decent area with a reasonable asking price. It was in fair shape and needed the basic repainting and window treatments. We got it a tad below the asking price and did the math. We could just about break even on the rent versus the mortgage payment. After the closing, we discovered our math was faulty. We had forgotten the pesky taxes and insurance, but, what the heck? We were on our way to riches beyond our imagination. The weekend after the deal was consummated, we got busy repainting and putting up some cheap mini-blinds. After cleaning the place and trimming the minimal landscaping around the front patio, we were ready. We placed an ad in the paper and waited for the crowds to rush over to rent the condo. And waited and waited. We had a few couples through and, after, four weeks and a few hundred dollars worth of ads later, we found a renter. We used the basic agreement recommended in the seminar and secured a deposit. They lasted one year and we had to repaint once again because of the mess they left behind. The next renter was there four months before we discovered they had large dogs, which was a direct violation of the contract. It took two months to get them out and, by then, the dogs had destroyed the carpet. The whole unit had to be recarpeted at a considerable cost. The next couple left after six months and stiffed us for the final payment, leaving in the dark one night. Another renter stole our toilet. That’s right, for some unknown reason, they actually stole the downstairs toilet! Vandalism, lost rent and other absurd behavior continued for five years. During that period, we had to raise the rent to cover the escalating insurance and tax rates. We could never recoup the cost of repainting, carpeting, and replacing various appliances and fixtures. We didn’t have the money or inclination to obtain any other rental properties as this loser property sapped most of our time and energy. We watched the comps in the area and the price of the condos hadn’t increased in value a single dime over the course of five years. Mercifully, we got a letter from the city one day, explaining they were taking the entire complex by eminent domain to construct a freeway. We happily got back our original investment (without any profit, mind you) and left the world of investing behind us forever. My advice to would-be investors is to have realistic expectations. Not everyone makes money in real estate. Do your homework, make sure you have deep pockets, and consider how much time, effort, and savings you’ll be using up. And, Mr. Allen, if you’re reading this article, you are a terrific salesman and you taught me a valuable lesson. Albeit not the one you probably described in your book.